March 18. FOMC loses patience
–HARD flattener Tuesday in front of the FOMC announcement today. Red/gold eurodollar pack spread dropped a whopping 8.625 bps with Reds -1.625 and Golds +7. The lowest I have marked red/gold this year (on a rolling basis) is 105.25, in early January. This is the second lowest of the year at just 1 bp higher, 106.25. 5/30 treasury spread also at a new recent low 105.8, down 5 on the day. Low of this calendar year has been 103. 2/10 was down 5.5 to just above 139.
–Heavy selling in front eurodollars, notably at least 100k EDU5, with prelim open interest showing an addition of 61k contracts. I guess SOMEONE thinks “patient” is disappearing. But whether modest tightening comes in June or not, a somewhat less accommodative Fed in a world of crashing oil prices and slowing growth can certainly set the stage for new curve lows. My inclination is to lean against flattening in the back end of the curve, as China is likely to respond to its weakness with highly stimulative measures, and yoy comparisons with today’s oil and other commodity prices are likely to bottom out and start rising some months from now. Additionally, the market holds the opinion that Fed moves can only come in 1/4% increments. However, the September 2014 SEP was the first time that the “dots” showed 1/8% increments. Could the first Fed hike be a move from 0-25bps to 12.5-37.5bps, with interest on excess reserves moving up just 1/8%?
–There have been several high profile warnings recently about increased volatility and stock market crashes(?), no, we’ll just call them ‘corrections’, notably Ray Dalio. (From the FT, ‘Dalio warns Fed of 1937 style rate risk…says rate rise could have unintended consequences’). So, crash in 1929, repeat in 1937 and war in 1939. Let’s see, crash in 2007-08, repeat in 2015, war in 2017? I guess we’ll let President O’Malley deal with that…
March 17. Green beer
–Quiet day Monday with underlying bid in treasuries despite stronger stocks. Crude oil is the big mover, down over $1/bbl late to 43.80, and off another 50 cents this morning. Ten year yield fell a couple of bps to 209.5. Trade in eurodollars was generally biased toward a less aggressive Fed, with some large midcurve put sellers. There was also a large seller, 50k, of EDU5/EDZ5 spread at 20.5 (settled there, -1.0 on the day, a new recent low). In what is perceived to be a ‘tightening’ environment, three month calendar spreads well below 1/4% offer a subdued sense of how proactive the Fed might actually be. Additionally, for those like myself who can’t quite clear away the cobwebs of ‘turn of the year funding pressures’, the preference is to SELL the Dec’15 contract in spreads. Dec 31 is a Thursday this year so it’s a long turn. Hey let’s all sell the Dec/March/June fly at -1…
–Commodities remain weak across the board with new lows in the CRB index. The dollar remains strong. And US economic data is surprising to the downside. The Fed’s forward projections are generally too optimistic; even with the removal of ‘patient’ from the FOMC statement, the forward path of rate policy as indicated by the dots appears fancifully hawkish. I would again note that in the December meeting, the dot average for the end of 2016 was a bit over 2.5%, more than 100 bps higher than what is projected by the EDZ16 contract at 9835.
–News today includes Housing Starts, expected 1.048m.
March 16. Ten year yields are comfortable between 2-2.25%
–Rates rose slightly Friday even as oil plunged over $2 bbl to 45, near the low of the move [new low last night into the 43 handle]. Ten year yield closed 211.7. Stocks also gave back a substantial portion of Thursday’s rally. And the euro traded below 105 as the Fed meeting this Wednesday centers around whether the word “patient” will be dropped. In terms of treasury yields, the picture is mixed as these two stories from Bloomberg show: First, “Beware the $300 Billion Shift into Treasuries Coming from Japan”. This article helpfully points out that US yield are relatively high. Then from this morning “Watch out for Central Bank Sales Even as US Yields Attract.”
http://www.bloomberg.com/news/articles/2015-03-16/treasury-investors-have-cause-to-be-edgy-on-overseas-demand-data I guess the takeaway is that there are both buyers and sellers (and both spurred from the heavy hands of central banks). Thanks.
–The CME is charging for every bit of data these days. On the (still free) BLOCK TRADE page at 8:28 Friday there was a trade of 70k 0EU 9837p for 16.5 covered 9853.5 (buy). On the prelim open interest sheets, there are only 250 contracts shown as trading, with open interest down 13050 to 76275. 0EZ 9800p also bought…also appears to be a cover. You get what you pay for?
–Here’s a question, if employment data is getting so much better then why are both student loan and auto default rates going up? This is a bit old, from BBG mid Feb 2015…”Data from the New York Fed released Tuesday showed 11.3 percent of student loans were delinquent in the final three months of 2014, up from 11.1 percent in the prior quarter. The share of auto loans at least 90 days overdue also rose, climbing to 3.5 percent from 3.1 percent the prior period, even as fewer credit card and mortgage loan payments were late.”
–News today includes Empire State and Industrial Production, expected +0.3 with Capacity expected 79.5.
March 12. Honking the horn
–Eurodollars were mostly unchanged Wednesday, but treasury yields dipped, going into and coming out of the ten year auction. Ten year yield fell almost 2 bps to 211.
–There’s a story in the FT noting that dollar strength is creating a dilemma for the Fed as it prepares to hike. The dollar index is going parabolic as the euro crashes, and central banks around the world continue to cut rates, South Korea having done so today. (“You’re going the WRONG way!” “How do they know where we’re going?”). The Korean won, unsurprisingly made a new low against the dollar but has stabilized. There was a late buyer of 50k EDM5 at 9960.5 yesterday; perhaps the Fed’s hands are tied and can’t get to the steering wheel, like Del Griffith.
–The Fed announced stress test results and major banks promptly said they were returning money to shareholders through dividends and stock buybacks. Stock buybacks by JPM, MS, BAC, Citi. I know nothing about what exactly drives those decisions, except that other companies are also doing it, in order to retire shares and therefore increase earnings per share metrics on the remaining. It reminds me of a Seinfeld skit, where he says, “How about the guy who sees an attractive woman walking past and he honks the horn? Now there’s a guy who has run out of ideas…” I can’t help but think that’s where the banks are. In an environment with a positive yield curve, respectable GDP growth, where banks can borrow for nothing and lend with a good cushion, and ALSO get paid by the Fed for excess reserves, the best idea they can come up with to build value is to buy back shares. All I can see is a moron beeping the horn.
March 11. EM weakness to forestall a June rate hike?
–Once again, yields are dropping as we go into the ten year note auction. Yesterday tens fell around 6.5 bps to 213 on the w/i. The curve flattened with red/gold eurodollar pack spread declining 4.375 bps to 127. Stocks, oil and the Euro were pounded yesterday (SPX -1.7% and CL down 134 late to 4866). EURJPY was down 186 to a new low of 129.61. The Nikkei has gone from 15000 in October to 19000 in the beginning of this month. If the Japanese economy is dependent on exports, and the EU is out-devaluing the yen in search of the same export markets, and the Chinese economy is slowing, then the Nikkei is a short. Headlines on the FT this morning: China data point to sharper slowdown, Steep deceleration in virtually all economic indicators.
–Implied vol firmed slightly in interest rates as yields eased. However, there was a seller of about 10k TYJ 126/128 strangle at 33, approximately 1/4% wide in terms of yield, so around 2.00 to 2.25 strikes. Probably not a bad bet with expiration only two and a half weeks away.
–The plunge in EM currencies is intensifying, to the point that the Fed may want to sit on the sidelines at the June meeting. I was looking back at the 1998 episode of the Asian crisis and failure of LTCM…at the time I had never even heard of Malaysian Ringgit, or Indonesian Rupiah or the Thai Baht. But I do know that the rupiah is making new lows now, right along with Brazil, etc. Perhaps next week’s FOMC will offer some clues in terms of further reference to “…financial and international developments.” In any case, in eurodollars there was a large trade that would benefit if perceptions shift more toward a September rather than June hike. Buyer of EDM 9962/9975 call spread vs selling 0EM 9887/9900cs for 0.25 bp in 40k. Near spread is 2 out of money, the back end is 16.5 away. This one could still have some risk in it if stocks plunge…
March 10. Monday’s bounce in stocks is over as the dollar soars
–Both bonds and stocks staged modest bounces from Friday’s sell off. However, the dollar index edged to a new high with the euro essentially unchanged on the day. Ten year yield eased 4 bps to 219.5. The curve flattened slightly with 2/10 down 1.5 bps to 150. Volume was quite light.
–This morning the dollar has powered higher with the euro moving closer to parity at 107.50 (-1.10). $/yen has risen above 122 and USD/BRL has sliced through 3.00, highlighting emerging market fault lines. S&P’s are currently 2067, testing Friday’s low. Treasuries are only slightly higher, as EM weakness perhaps leads to selling of dollar reserves. Additionally, treasury auctions 3 years today, followed by tens and bonds Wednesday and Thursday.
–Other news today includes NIFB Small Business Optimism, which had been on a fairly strong uptrend until last month, and JOLTS data.
–One interesting trade relating to expected Fed action was a seller of EDZ5 9925c at 11 covered EDU5 9939 with 40 delta. If the Fed hikes in June, then odds for a Fed hike in September will likely be 60-80%. EDU5 price would then probably trade 9930 to 9935, not much lower than the current level, but the calls will have lost time value. On the upside, when just looking at the forward contracts in EDM and EDU calls, it looks like a small winner. Certainly an increase in the EDU5/EDZ5 spread helps the trade, the futures calendar saw fairly heavy volume yesterday 23.5 to 24.5. With the Fed supposedly near a hiking cycle it seems like a three month spread should probably trade north of 1/4%. But it doesn’t, yesterday’s settle 23.5.
March 9. Friday’s payroll data caused yields to move higher, but the overall theme is still one of restraint
–Friday’s employment data (NFP 295k, rate 5.5%) sparked a large sell off in interest rate futures. TYM5 closed down exactly 1 point at 126-020, and the current ten year jumped 12.9 bps in yield to 223.4. Nearly all euro$ calendar spreads made new highs, however there is still no one-year calendar spread that’s over 100 bps. Peak continues to be EDU5/EDU6 as it has been for quite some time, at 95 bps up 6 on the day. In terms of rate hikes through the end of the year, note that January 2016 Fed Fund contract closed at 99.335, which was down 8 on the day. However, with the near FFH’15 contract at 99.885, the January contract is just 55 bps higher in yield, and excluding March and April meetings which Yellen indicated are off the table, there are still five FOMC meetings before the end of the year. So although Friday’s reaction was fairly large, the market is really not pricing aggressive Fed moves as had occurred in previous tightening cycles. The decline in implied vol is another sign that fears of much higher rates are restrained; even after adjusting for the weekend time value TYM vol is just 5.8.
–Also released late Friday was the Consumer Credit data, which showed another decline in revolving credit cards, -1.6% in Jan. Though non-revolving (autos and student loans) is nearly 3/4 of the total amount, in aggregate there has been deceleration for the past three quarters. Here are the growth rates: 2014 Q1 6.5, Q2 8.2, Q3 6.7, Q4 6.0 and January only 4.2. Perhaps it will be the same pattern as last year, a slowdown associated with the polar vortex. But I doubt it. I would weigh Factory Orders and Consumer Credit more heavily than lagging jobs data. The US economy is slowing down. With the drop in gasoline, one might think that auto lending would be through the roof. The weekly savings in fuel go a long way in terms of low monthly auto payments, especially since maturity terms have been stretched. But in spite of the Q3 and Q4 fall in fuel prices, households are holding back.
–This week brings treasury auctions of 3’s, 10’s and 30’s. Retail Sales data on Thursday.
March 6. Coincidence? Factory Orders down six months in a row, shortly after oil and EUR topped
–US interest rates edged slightly lower in front of today’s employment report. NFP expected 235k with a rate of 5.6%. Ten year yield yesterday fell 1.5 bps to 210.5. Green euro$ pack was the strongest part of the curve, +3.875. One year calendar spreads from greens back made new recent highs.
–Factory orders came out yesterday, negative for the sixth month in a row. Gee, that’s funny, the downturn started just after the euro and crude oil topped last summer. Jobless claims were also released, back above 300k at 320. Just remember, employment is a lagging indicator. Additionally, the absolute number of jobs doesn’t necessarily indicate robust labor markets. This item is from CIBC relating to Canada, but has relevance here as well: “That means more people are working part-time instead of full-time, more people are self-employed instead of having secure employment and more are in low-wage jobs than at any time in the last 25 years, says CIBC economist Benjamin Tal.”
http://www.cbc.ca/news/business/job-quality-in-canada-at-25-year-low-says-cibc-1.2982891
–The dollar continues to go on a tear, not just against the euro (now under 110), but against emerging market currencies as well. Brazil raised rates, THAT didn’t stop the fall in the real. Turkey recently cut, and that most certainly didn’t stop the fall of the lira. Is China, grappling with their own set of problems, simply going to stand aside and let one export competitor after another (Japan and now EU) depreciate their currencies?
–Huge trading yesterday in December EDZ5 eurodollar options. The largest trades were exits of 9912/9900 put spreads and 9950/9975 call spreads, both sold at 4 against various futures levels. Open interest in EDZ5 puts in total dropped 333k and in calls 68k. Other option activity mostly consisted of call buying/put selling… not exactly a sign of much higher rates in the future.
March 5. Oil and the US long bond
“The downward pressure on China’s economy is intensifying,” Li told around 3,000 delegates gathered at the Great Hall of the People to the west of Beijing’s Tiananmen Square.
–It’s all about China today, as Li shaved the growth target to around 7% and signaled a wider budget deficit. In Yellen’s semi-annual testimony last month, China was mentioned specifically, “In China, economic growth could slow more than anticipated as policymakers address financial vulnerabilities and manage the desired transition to less reliance on exports and investment as sources of growth.” [“Investment” Like building empty cities] The best summary is this link to AEP, ‘Liquidity evaporates as China’s fiscal cliff nears’
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11450691/Liquidity-evaporates-in-China-as-fiscal-cliff-nears.html
–In US interest rate markets yesterday there were little net changes. However, there was slight steepening between 5/30 and 5/10 treasury spreads. The long end of the US curve continues to trade heavy. On a fundamental basis, I think the US economy is slowing and the continued strength of the dollar is like a big wet disinflationary blanket. However, in terms of price action, the long bond is simply weak. Note on the enclosed chart the (short term) mirror image between crude oil and USM. Oil bottomed in late January, the bond topped. Yesterday, in spite of new highs in the dollar index, oil closed up over a dollar and the bond contract was weaker. Just something to be aware of…
–The big trade yesterday was a new seller of 55k midcurve September 0EU 9837.5p 19.5 to 18.5, mostly covered against red pack futures with 40 delta. This premium selling caused a lower vol adjustment through the curve, with red mid straddles dropping a bp or so. Interesting in that it came just in front of tomorrow’s employment report.
–While many central banks cutting rates, Brazil raised to 12.75%, a six year high, to curb inflation. The Fed’s posturing for rate normalization is taking its toll across the world and is, of course, hurting US exporters. If non-domestic issues were to intensify and forestall Fed tightening, the US curve could steepen violently sparked by a mad scramble to exit flatteners.
March 4. US looks ok, but the rest of the world is giving off bad vibes
–Yields rose Tuesday (perhaps unsurprisingly as Activas sold $21b in bonds) with the ten year note up just over 4 bps to 212.1. Some of the near eurodollar calendar spreads edged to new highs, for example Dec’15/Dec’16 one-yr spread rose 2 bps to 90.
–While the situation in the US reflects continued recovery (ignoring yesterday’s misses in auto sales), some other markets signal concern with global demand. Alibaba shares made a post IPO low… just problems with China, or something more? Sugar futures, and coffee, plunged to new lows. Just a stronger dollar and problems in Brazil, or something more? India cut rates today, lowering its policy repo rate 25 bps to 7.5%, its second inter-meeting cut this year. Bloomberg notes that China is expected to cut again, and that Australia’s economy grew lower than expected last quarter.
–Economic news in the US today includes ADP expected 220k, and Service ISM expected 56.5. Beige Book in the afternoon.
–Not everybody is able to borrow at zero rates… “Springleaf showed that the average interest rate on its outstanding loans has been around 26% to 27%.”
http://finance.yahoo.com/news/new-subprime-loan-giant-created-from-spare-parts-of-aig-and-citi-162831796.html
“…The resulting company will now be, by far, the biggest lender to consumers with lower credit scores in the country. It will have nearly 2,000 branches in 43 states, through which it provides personal and auto loans at high interest rates to customers with little access to other forms of credit.
A recent investor presentation by Springleaf showed that the average interest rate on its outstanding loans has been around 26% to 27%. Losses for bad loans have been trending below 5%, leaving an effective yield earned by Springleaf near 22%. Springleaf personal loans average $4,000 to $5,000 in size and 40 months in term. Typical uses are for debt consolidation, home or car repair or medical bills.
HAHAHAHAHA…debt consolidation. Good one.
